Does AxoGen Have the Nerve to Break-Out?

AxoGen (AXGN) shares have reached new highs this summer, before falling off slightly this week. Can this well-performing stock with a unique niche in the orthopedic space maintain upward momentum and break out to new highs again? Product penetration may hold the key.

Revenue Momentum driving share price

AxoGen posted revenue growth of 64% in their most recent quarterly results (Q1/2016), to a near-record $8.1 million, and the third straight quarter of 60%+ revenue growth. Sales were driven primarily by increased penetration of the company’s three nerve repair products into existing accounts, and to a lesser extent the addition of new accounts.

While the company did not provide specific revenue targets for the upcoming Q2/2016 (due out August 3rd), they did reaffirm revenue guidance for full-year 2016, at $39 million, or over 43% increase from 2015. For the second quarter, we estimate that sales will increase to nearly $9 million for AxoGen, a new record for the Company and 40% year-over-year growth. The real pay-off for investors, though, may come after third and fourth quarter results are reported by AxoGen, both are which are anticipated to be close to or over $11 million, and near break-even on an EBITDA basis, thanks to higher sales volumes as well as improved gross margins. Although the Company has plenty of financial resources available, stemming from public and private equity offerings completed last year, a profitable quarter, which could be achieved sometime in 2017, would represent a financial bellwether for AxoGen and possibly attract new investors, especially institutions which require positive net income metrics before purchasing a stock.

R&D track record adding long-term value

AxoGen’s three main products, Avance Nerve Graft, AxoGuard Nerve Protector and AxoGuard Nerve Connector, make up a majority of the Company’s sales and were all internally-developed. A more recent product, AcroVal neurosensory and motor testing system, was licensed from a well-known surgeon inventor and launched in March. Beyond product approval and launch, AxoGen has done a solid job in further developing and marketing its products, including initiating major post-marketing studies such as RANGER, a large, on-going (850 patients to date) study using Avance in peripheral nerve repair, CHANGE, a comparison study with Avance against older techniques for hand nerve repair, a pilot study in nerve reconstruction in prostate surgery, and finally RECON, another study in hand nerve repair but one that will be key in completing an FDA Biologics license application for Avance. A Biologics license will be an important step in adding to the intellectual property surrounding the Company’s exclusively licensed (privately-held Cook Biotech) proprietary medical products. Further down the road, AxoGen is targeting product extensions for its nerve repair products, for example into instruments, or branching out into whole new markets altogether, such as breast reconstruction, facial re-animation, or pain management. AxoGen is also targeting international expansion, in particular nine countries outside the US, primarily in Europe and Canada through CE Mark registration and Health Canada regulatory approval.

Attractive to larger players in the consolidation-oriented Ortho space?

So far, AxoGen has succeeded without an industry partner for investment, although the Company does have a number of partners in other areas, including Cook Biotech, the University of Florida and University of Texas in the patent area, and Essex Woodlands, Three Peaks Capital, and Deerfield Management on the institutional capital management side. Still, the orthopedic implants and products space is characterized by heavy acquisition activity as larger firms seek to enter new, related areas or mid-size players search out companion products to keep their inside sales teams busy. Who might be a potential buyer for AxoGen, at a current price/sales ratio (based on 2016 forecast) of 5X revenues? Possible interested parties could include current or past competitors, such as Integra Life Sciences (IART), Baxter International (BAX), or Stryker (SYK), private companies (Cook Biotech, for example is larger), private equity, or other companies in the orthopedic space such as Johnson & Johnson (JNJ), Zimmer Biomet (ZBH), or Orthofix (OFIX).

Disclosure: The author owns shares of Johnson & Johnson (JNJ) but does not own shares of any of the other companies mentioned in this report.

Published on Jul 22, 2016

By Robert Wasserman

Bob Wasserman has been following healthcare and biotech stocks for over 30 years, with a bias toward value investing.